Reading 9 - The Firm and Market Structures - Custom Scholars
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# Reading 9 – The Firm and Market Structures

question
Is perfectly elastic because all firms are price takers.

-An increase in price will make the firm loose all demand since products are identical

-Supply and Demand determine the prices
question

- An increase in price might decrease demand since there are good substitutes.
question
Oligopoly
Interdependent firms

-Which make all firms consider changing their prices based on other's decisions
-Different models to assess these decisions.
question
Down ward facing demand and has the power to choose the price to sell the product.

-Will choose to maximize profits
question
Nature of competition
Oligopoly and monopolistic competition differentiate their products with the help of marketing and features.

question
MR = MC
Profit maximization for ALL structures.

-For price takers, MR is the same as price because all additional units are to be sold at the same market price.
question
Profit Maximization
Profit maximization is maxed at MC = MR or

When total revenue exceeds total cost by the maximum amount.
question
No economic profits in perfect competition
Firms will enter the market with identical cost curves.

In equilibrium = P = MR = D = MC = ATC

ATC is at its minimum
question
Long - run equilibrium
Price = ATC

-In monopolistic competition P > MC, there is a markup.

-ATC is not at a minimum, suggesting inneficiency
question
Oligopoly Models
- Kinked Demand
- Cournot Duopoly
-Nash Equilibrium
-Stackelberg
question
Kinked Demand Assumptions
An increase in price will not be followed by other firms, but a decrease will.

-More elastic demand above a specific price. When price rises above x, demand will be more sensitive to changes.

-Below is less elastic because firms will follow price decreases.
question
Cournot Model
Duopoly, two firms, will set price based on the other firm's previous decisions.

-Output will be shared and price is less than a single monopoly potential.
question
Stackelberg Model
One Leader firm that sets the price and others base their decisions on that.

-As more firms are added to the model, equilibrium price drops.
question
Nash Equilibrium
Collusion is an important concept here. Choosing the best possible outcome for both.
question
Less cheating in collusion
- Few firms
- Similar cost structures
-Purchases are relatively small and frequent
-Retaliation is more harsh
question
Dominant firm
A dominant firm sets the price, other firms are price takers.
question
Price range in Oligopoly
Somewhere between perfect collusion (Monopoly Price) and perfect competition that generate zero profits in the LR
question
MR formula
MR = P(1-1/elasticity)
question
Price Discrimination
-Must have at least two identified groups with different elasticities.
-No reselling
question
DWL is reduced when there is price discrimination.

-Charge the maximum customers are willing to pay.
-Less total output and higher prices

-Higher DWL compared to Perfect Competition
question
Natural Monopoly Regulations
1) Average Cost Pricing = GOOD

-Normal profit because Price = ATC
- ATC = Demand curve

2) Marginal Cost Pricing =

MC = Demand curve
-Increases output and reduces price
-Subsidies
question
Supply curve within market structures
- There is no supply curve in any except perfect competition.

-Quantity supplied depends not only on a firm's MC but on demand and MR
question
Supplu function Perfect Competition
MC Curve above AVC curve.
question
HHI M&A
Sum of the market shares before and after the merger. Maintaining same amount of firms constant.

-Sensitive to mergers with two large market share firms
question
n-firm concentration ratio
- Simple to calculate

- But does not measure market power or elasticity of demand

-Barriers to entry are not considered
1 of 25
question
Is perfectly elastic because all firms are price takers.

-An increase in price will make the firm loose all demand since products are identical

-Supply and Demand determine the prices
question

- An increase in price might decrease demand since there are good substitutes.
question
Oligopoly
Interdependent firms

-Which make all firms consider changing their prices based on other's decisions
-Different models to assess these decisions.
question
Down ward facing demand and has the power to choose the price to sell the product.

-Will choose to maximize profits
question
Nature of competition
Oligopoly and monopolistic competition differentiate their products with the help of marketing and features.

question
MR = MC
Profit maximization for ALL structures.

-For price takers, MR is the same as price because all additional units are to be sold at the same market price.
question
Profit Maximization
Profit maximization is maxed at MC = MR or

When total revenue exceeds total cost by the maximum amount.
question
No economic profits in perfect competition
Firms will enter the market with identical cost curves.

In equilibrium = P = MR = D = MC = ATC

ATC is at its minimum
question
Long - run equilibrium
Price = ATC

-In monopolistic competition P > MC, there is a markup.

-ATC is not at a minimum, suggesting inneficiency
question
Oligopoly Models
- Kinked Demand
- Cournot Duopoly
-Nash Equilibrium
-Stackelberg
question
Kinked Demand Assumptions
An increase in price will not be followed by other firms, but a decrease will.

-More elastic demand above a specific price. When price rises above x, demand will be more sensitive to changes.

-Below is less elastic because firms will follow price decreases.
question
Cournot Model
Duopoly, two firms, will set price based on the other firm's previous decisions.

-Output will be shared and price is less than a single monopoly potential.
question
Stackelberg Model
One Leader firm that sets the price and others base their decisions on that.

-As more firms are added to the model, equilibrium price drops.
question
Nash Equilibrium
Collusion is an important concept here. Choosing the best possible outcome for both.
question
Less cheating in collusion
- Few firms
- Similar cost structures
-Purchases are relatively small and frequent
-Retaliation is more harsh
question
Dominant firm
A dominant firm sets the price, other firms are price takers.
question
Price range in Oligopoly
Somewhere between perfect collusion (Monopoly Price) and perfect competition that generate zero profits in the LR
question
MR formula
MR = P(1-1/elasticity)
question
Price Discrimination
-Must have at least two identified groups with different elasticities.
-No reselling
question
DWL is reduced when there is price discrimination.

-Charge the maximum customers are willing to pay.
-Less total output and higher prices

-Higher DWL compared to Perfect Competition
question
Natural Monopoly Regulations
1) Average Cost Pricing = GOOD

-Normal profit because Price = ATC
- ATC = Demand curve

2) Marginal Cost Pricing =

MC = Demand curve
-Increases output and reduces price
-Subsidies
question
Supply curve within market structures
- There is no supply curve in any except perfect competition.

-Quantity supplied depends not only on a firm's MC but on demand and MR
question
Supplu function Perfect Competition
MC Curve above AVC curve.
question
HHI M&A
Sum of the market shares before and after the merger. Maintaining same amount of firms constant.

-Sensitive to mergers with two large market share firms
question
n-firm concentration ratio
- Simple to calculate

- But does not measure market power or elasticity of demand

-Barriers to entry are not considered

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